“Typically, in an employment context, you’re not going to have a fiduciary duty – you would have your basic common law employment relationship that obliges you to act faithfully and with loyalty to your employer, and if you leave your employment, you’re allowed to lawfully compete against your former employer and apply the general knowledge that you accrued.”
So says Michael Penner, a labour and employment lawyer with Kent Employment Law in Victoria, referring to an employer’s claim of a breach of fiduciary duty by a worker that was dismissed by both a trial court and the British Columbia Court of Appeal.
“Typically, you see it more in corporate law than employment law, and the reason being is that a fiduciary duty usually exists if you are a director or a senior officer of a company because you owe that duty to the company itself,” says Penner.
Winding down operations
The England Group (TEG) was a company that invested in and syndicated properties. In 2005, the company stopped acquiring properties and kept its existing portfolio, marketing its investment products through investment advisors.
The worker joined TEG in 2011 as “special projects,” with his job duties focusing specifically on a property in Prince George, BC. The worker soon changed his role to investor relations manager, which involved communicating with existing investors and their advisors about the status of their investments.
In 2014, TEG’s owner and director was planning on retiring, so he decided to wind down the company’s active operations. Over the next year, TEG sold its properties and paid the proceeds to investors. The worker’s duties became focused on distributing the funds to investors along with communicating with investment advisors and issuing their fees.
In early 2015, the worker began discussing employment opportunities with another investment firm called Churchill. TEG’s director encouraged him, and the worker described himself to Churchill as part of TEG’s “inner circle” with access to the company’s investor list.
A short time later, TEG’s director started discussing the possibility of Churchill acquiring TEG’s investor contact list and the negotiations continued throughout 2016.
Twice in 2015, potential TEG investors contacted the worker and he advised them that TEG had no new products to offer. He recommended that they join Churchill.
The worker joined Churchill as a vice-president in 2016. TEG was still winding down its operations, so the worker remained a part-time employee to help out through part of 2017. TEG did not require the worker to sign a confidentiality or non-competition agreement.
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Worker, director promoted Churchill
The worker promoted Churchill investments with TEG advisors on several occasions. In late 2016, TEG’s director emailed a TEG advisor to provide his “full endorsement” of Churchill products.
On Dec. 7, 2016, Churchill’s owner emailed a draft agreement for the investor list and endorsement of Churchill to TEG’s director, copying the worker. The director replied with a thank you but said nothing else.
According to TEG’s director, he was vague in his response because he hadn’t yet decided on whether to sign the agreement. However, the worker took the email response to mean that the director had accepted the agreement.
In January 2017, the worker sent an email from his TEG account to his Churchill account with lists of investor contact information. He later emailed 140 of TEG’s former investors to promote Churchill products.
In late 2018, the worker and TEG’s director had a falling out over a property and TEG filed a claim against the worker and Churchill for breach of fiduciary duty, pointing to the worker sending the investor contact list to his personal email “furtively and dishonestly” and then sharing it with Churchill.
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No breach of confidence
The trial court found no issues with the worker recommending Churchill’s products because TEG was not offering investment products any longer. There was also no evidence that the worker breached any confidence in any communications with TEG investment advisors, the court said.
The trial court also found that it was likely that TEG didn’t object to the worker marketing Churchill’s products to TEG’s former advisors, particularly since TEG’s director endorsed Churchill to one of them himself. In addition, the advisors were all employed at major banks or investment houses who could be easily found, the court said.
As for the worker emailing himself the investor list, the trial court didn’t consider this to be “furtive or dishonest,” as it was easily traceable and the timing supported the worker’s contention that he believed the director had accepted the agreement.
The trial court noted that “the employee-employer relationship is not a traditional category of fiduciary relationship” and requires more than just access to confidential information. An employee must have “a high level of control or authority” to have fiduciary duties, the court said.
The worker did not have any discretion or power over TEG’s legal or practical interests, he didn’t provide any undertaking that he would act in TEG’s best interests after the end of 2015, and his role after 2015 was primarily administrative, said the court. TEG’s director had all of the power and decision-making so the worker had no fiduciary duty to TEG, the trial court ruled.
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Employer’s litigious intent
The trial court also awarded double costs against TEG for rejecting two offers to settle, including one that represented more than twice the gross fees received by Churchill from using the investor list. TEG might have been “more intent on pursuing the action than receiving fair compensation for any wrong it had suffered,” said the trial court.
TEG appealed the decision, arguing that the specific factual circumstances of the relationship led to a fiduciary obligation for the worker.
The Court of Appeal noted that the employment relationship here was not one that traditionally gives rise to fiduciary duties. For there to be an ad-hoc fiduciary relationship, the worker would have to be able to exercise some discretion or power, use that power to affect the company’s interests, and the company was vulnerable to that power or discretion.
The appeal court agreed with the trial court that the director did not delegate any power to the worker, the worker’s duties after 2015 were primarily administrative, and the worker had no power to hire or fire employees. There was no evidence that the worker had any discretionary power giving rise to fiduciary duties, said the appeal court.
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No power or discretion
The worker just didn’t have any influential power or discretion with TEG, says Penner.
“He wasn’t acting unilaterally whatsoever – everything he did, he did through [the director], who himself was actively involved in the sale of his client list to Churchill,” he says. “It was clearly [the director] who was the one primarily responsible for the maintenance of that client list, and he was seeking to profit from it by selling it as he wound down his company.”
The Court of Appeal also found that the fact that the worker described himself has having an important role in the “inner circle” of TEC didn’t change his actual role. Although the worker had access to confidential information about TEG’s investors and advisors, such access does not on its own create a fiduciary relationship – which was the only issue in this case, said the appeal court.
“In the taking of the client list, TEG could have easily pursued a breach-of-contract argument saying that based on the employment agreement, he was obligated to maintain confidentiality – if you breach that, damages would flow from that,” says Penner. “But they didn’t argue that, they put all of their arguments into saying that the same conduct constituted a breach of fiduciary duty.”
The Court of Appeal also agreed that TEG should have accepted the second offer to settle, as it “substantially exceeded the fees Churchill earned from using TEG’s investor contact lists.”
TEG’s appeal was dismissed.
“The best way for the employer to insulate themselves from a breach of fiduciary duty is to articulate those duties at the outset – and this would really only be appropriate with senior-level employees or people with decision-making authority where they could unilaterally bind the organization to some type of obligation that would put them in jeopardy,” says Penner. “The easiest way to do that is to articulate that in the employment agreement itself, because then you at least labeled the duties of that position as being ones where it creates a fiduciary relationship.”
See England Securities v. Ulmer, 2023 BCCA 241.
By Jeffrey R. Smith
Jun 19, 2023
